Joint Audits: Promoting Investors' Confidence in the Corporate Reporting Process

Over the years, investors have relied on the financial statement audit in evaluating a company's financial performance. However, the quality of external audits has been questioned over the years because of the various financial scandals, including Enron, WorldCom and recently, FTX. These scandals have resulted in criticism of the auditors, especially on the aspect of competence and independence. For auditors, these concerns are audit risks that professional firms should address to forestall audit quality and enhance the confidence of business investors.

Market leaders and regulators have promoted joint audits to improve audit quality and reduce audit risks. Many countries have adopted joint audits, and the outcome has been impressive over the years. 

The concept of joint audit

A joint audit refers to appointing two or more independent auditors to take collective responsibility for an audit. This involves issuing a single opinion on the company's financial statements. This is different from a 'double audit' which involves performing the same audit twice by different firms and issuing two distinct opinions on the state of affairs of a company. Again, this is not the same as a 'shared audit' in which a firm is appointed to perform the audit of the group accounts and, usually, some of the components, while another firm, or firms, audits the other components, representing a significant share of the total group.

A joint audit involves two separate firms but can also involve three auditors. The principles of auditing relevant to a single audit also apply to a joint audit. However, while planning & risk assessment is jointly performed, the field work is allocated between the two auditors to avoid duplicity of work. Both auditors then conduct a cross-review of each other. After both parties are satisfied with the other's work, a final opinion is issued to the relevant stakeholders.

A joint audit allows for data verification by more than one audit firm, increasing confidence in the final verdict of the auditors. They both serve a complementary role to the other and are jointly liable for the audit opinion issued, which enhances the quality of the financial reporting process. The company benefits from the technical experience of multiple audit firms, leading to a healthy debate between the auditors on technical issues, increasing audit quality and ensuring professional scepticism where applicable. During this process, joint auditors can challenge the company's management on sensitive accounting treatments and improve the auditors' independence. Joint audit aligns with the famous phrase 'two heads are better than one' or even' four eyes are better than two'. These sayings promote the theory that joint audits improve audit quality.  

Global audit quality concerns

In 2001, the Enron case became a major scandal in the corporate business environment. Enron was a large conglomerate in the United States that appeared to be performing well but engaged in accounting and corporate fraud. The Enron scandal led to the loss of about $74 billion for its shareholders at the time of declaring bankruptcy. Despite their unethical accounting practices and window dressing, Arthur Andersen (the company's auditor) signed off on their financial statements issuing a clean, unqualified audit opinion. Arthur Andersen (Andersen), as an audit firm, failed to detect, ignored and approved accounting fraud, thereby giving a wrong audit opinion.

The Enron case indeed reduced investors' confidence in Andersen as an audit firm and in the audit process in general. The United States, being the jurisdiction where the incident occurred, responded with regulations, including the Sarbanes Oxley Act, to strengthen the audit profession. On the other hand, if Enron, as a listed entity, had joint auditors or if there was a mandatory requirement for joint audits for listed entities, the chances of the scandal would have been greatly reduced. The financial market and the stakeholders would have been saved from the tremendous financial loss. The same could be assumed for all other financial scandals after the Enron scandal.

The importance of joint audits was further evidenced in the Vivendi Universal (Vivendi) scandal, which occurred in 2001. Vivendi, a French media and telecommunications group, had two joint auditors, Arthur Anderson (its US auditor) and Salustro Reydel (its French auditor). While Arthur Andersen remained silent on the accounting treatment of the sale of Vivendi's 23% holding in British Sky Broadcasting Group, the French auditor flagged this to the French authorities as it was jointly liable for whatever accounting treatment adopted by Vivendi. This was a necessary disclosure by the French auditor as it would have inflated Vivendi's profit for the period by at least $1 billion.

Several reasons could give rise to audit failures ranging from interest in high revenue, which some professional firms do not want to lose, to reduced auditor independence due to long professional relationships with a client. Joint audit attempt to solve these issues. If an audit firm fails to detect or ignore accounting fraud, another firm will notice it, thereby improving audit quality.

Audit market concentration

In addition to improvement in audit quality, joint audits assist in reducing audit market concentration in a few firms. Global firms of professional accountants dominate the public practice, and the Nigerian market is no exception. A concentrated audit market is a barrier for new entrants into the accounting and audit industry. This lack of choice for companies and lack of competition for the big firms also reduces audit quality.

Also, introducing joint audits into the audit market will assist smaller firms in enhancing their personnel's competence through practical collaborative work with colleagues from bigger firms. The benefits of bigger firms over smaller firms are the experience, especially in specialized markets, the use of audit techniques and tools and the resources at their disposal. Collaboration among firms during joint audits would benefit smaller firms as they could learn during the process. This would, in return, have a positive effect in the long run on the audit market, increasing audit independence, promoting healthy competition and improving the quality of audit work done.

Corporate concerns for joint audit engagements

Finance leaders against mandatory joint audits believe that joint audits do not directly result in audit quality. Notable failures of a joint audit include the Bank of Credit and Commerce International (BCCI). BCCI was audited by two of the Big 4 audit firms, yet its money laundering and fraudulent activities were undetected by the auditors.

Another concern is the aspect of costs. There have been numerous research on the costs of implementing joint audits, especially when considering higher audit fees compared to improved quality, but the results have been inconclusive. Higher company costs and the level of investments required to implement joint audits have remained a significant concern. A comparison by Audit Analytics showed that audit fees in the French market (where joint audit is mandatory) equal the cost of using a single auditor in the UK market. This comparison was made for public companies earning similar revenues. Therefore, the concern for higher costs should be dispelled by the positive impact of engaging joint auditors, which strengthens the financial reporting process.

There is also the concern that the auditors might disagree on technical issues and find it challenging to come to a resolution and a common conclusion. When resolved, the differences in opinion on contentious matters promote the quality of the audit.

Recommendations

Joint audits are currently mandatory in certain countries and industries. For example, a joint audit in South Africa is compulsory for companies in the financial services industry. 

In France, since 1966, large, listed companies have been mandated to use joint auditors, with groups preparing consolidated financial statements joining this list in 1984. As a result, France's audit market is less saturated with few firms as many firms, including local firms, are encouraged to grow and compete professionally. 

The Financial Reporting Council of Nigeria (FRCN) introduced a corporate governance code in 2016, with mandatory joint audits for listed companies being a provision in that code. However, this code was met with backlash and scrapped shortly after.

We recommend that the FRCN consider introducing joint audits for public sector companies and companies in the financial services industry. In addition, voluntary adoption of joint audits could be allowed for companies outside this category. This will help improve the audit process, promote audit quality and enhance investors' confidence in the financial reports.

Conclusion

We believe the costs incurred in engaging joint auditors are worth it. This is because joint audit results in enhanced audit quality and financial security, reduced audit market concentration and more opportunities for audit practitioners. As obtainable in other countries like France, the Nigerian audit space could also have more firms auditing public companies to enhance investors' confidence in the financial reporting process. Joint audits present the opportunity to make this a reality. Indeed, audit committees, investors, and stakeholders will be assured that the audit opinion is appropriate, credible, and trustworthy.

Contacts

Chinedu Uchechukwu

Senior Manager, Quality and Risk Management

Obianuju Irechukwu

Senior Associate, Audit & Assurance Services

For enquiries on this article and more, kindly contact us via technicaldesk@mazars.com.ng